7.1 Mutual Fund Industry

What are mutual funds?

pool the resources of many investors by selling them shared using the proceeds to buy securities

How did mutual funds grow?

• At the beginning of 2013, 57% of retirement assets were held by mutual funds.

• 28% of the US stock market and almost 44% of all U.S. households hold stock via mutual funds

• Assets held by mutual funds have grown by about 17% per year for the last 25 years → reaching >$14 trillion

• The first mujtual fund similar to the funds of today was introduced in Boston in 1824

• Stock market crash of 1929 set the mutual fund industry back because small investors avoid stocks and distrusted mutual funds

• Investment Company Act of 1940

What was the Investment Company Act of 1940>

requiring disclosure of fees etc → reinvigorated the indusrty

What ar ethe 5 principal benefits of mutual funds?

1. Liquidity intermediation: investors can quickly conver investments into cash

2. Denomination intermediation: investors can participate in equity and debt offerings that individually require more capital than they possess

3. Diversification: investors immediately realise the benefits of diversification even for small investments.

4. Cost Advantages: mutual fund can negotiate lower transaction fees than would be available for the individual investor

5. Managerial expertise: many investors prefer to rely on professional money managers to select their investments

How has ownership in mutual funds change over the last 20 years

changed drastically:

• 1980 - only 5.7% of households held mutual fund shares

• 2013 - 75% held

• Mutual funds account for $5.3 trillion of the retirement market - est. at $19.5

What doe sthe total industry net assets vs net mutual funds look like

What is the mutual fund structure?

• offer a number of different types of mutual funds

• can move investments btw/ funds w/o penalty

• Complexes often issue consolidated statements

What are the different fee structures in mutual funds?

Closed-End Fund

• a fixed number of nonredeemable shares are sold through initial offering and are then traded in the OTC market - price for the shares is determined by supply and demand forces

Open-End Fund:

• investors may buy or redeem shares at any point, where price is determined by the net asset value of the fund

What is Net asset Value (NAV)?

Total value of the mutual fund’s stocks, bonds, cash and other assets minus any liabilities such as accrued fees, divided by the number of shares outstanding

Whats an example of calculating a mutual funds NAV

What does the organisational structure of a mutual fund look like

What are the 4 primary classes of mutual funds available to investors?

1. Stock (equity) funds

2. Bond funds

3. Hybrid funds

4. Money market funds

What does the distribution of Assets among types of mutual funds look like?

What are the investment objective classes?

• Stock funds

• bond funds

• hybrid funds

• Money Market Mutual Funds

• Index Funds

What are stock funds?

• other than investing in common equity the stated objective of any particular fund can vary dramatically

• Capital appreciation funds seek rapid increase in share price, not being concerned about dividends

• Total Return Funds seek a balance of current income and capital appreciation

• World Equity Funds invest primarily in foreign firms

• Other types in Value, growth, a particular industry

What are bond funds?

• strategic Income Funds invest primarily in the U.S. corporate bonds, seeking a high level of current income

• Gov bond Funds invest in U.S. Treasury, as well as state and local gov bonds

• Others inc World Bond Funds etc

What does the distribution of assets among the bond fund classification look like?

What are hybrid funds?

• combine stocks and bonds into a single fund

• Account for about 5% of all mutual fund accounts

• Gives flexibility of stocks and bonds

What are Money Market Mutual Funds?

• open- end funds that invest only in money market securities

• Offer check-writing priveleges

• Net assets have grown dramatically

• Although money market mutual funds offer higher returns than bank deposits the funds are not federally insured

• relatively safe

What does the distribution of Assets invest in MMMF look like

What are Index Funds?

• a special class of mutual funds that do fit into any of the previous categories

• the fund contains the stock of the index it is mimicking - S&P 500 index fund would hold the equities compromising of the S&p 500

• Offers benefits of traditional mutual funds without the fees of the professional money manager

What are different fee structures of Investment funds?

• Load funds (Class A)

• Deferred load (Class B)

• contingent deferred sales charge (Class B)

• redemption fee (class B)

• exchange fee (Class C)

• Account maintenance fee (class C)

What are loan funds?

Class A shares

Charge an upfront fee for buying the shares.

No-load funds do not charge this fee

What is deffered load

Class B shares

funds charge a fee when the shares are redeemed

What are contingent deferred sales charge?

Class C

a back end fee that may disappear altogether after a specific period

What is a redemption fee?

Class B

another name for a back end load

What is an exchange fee?

Class C

A fee for transferring money btw funds in the same family

• usually low

What is an account maintenance fee?

charges if the account balance is too low

What is a 12b-1 fee

Class C

fee to pay marketing, advertising and commissions

What are the 4 primary laws that regulate Mutual funds?

• Securities Act of 1933: specifies disclosure requirements

• Securities Exchange Act of 1934: details antifraud rules

• Investment Company Act of 1940: requires registration and minimal operating standards

• Investment Advisors Act of 1940: regulates fund advisors

In US, what is the law for Mutual Funds and independent directors?

In US mutual funds are the only companies that are required by law to have an independent directors as follow:

• they must consititute a majority of the board

• they select and nominate other independent directors

• legal counsel to them must also be independent

How are Hedge Funds different from mutual funds?

• high min investment, averaging around $1 mil

• LR commitment of funds is required

• High fees: typically 1% of assets pls 20% of profits

• Highly leveraged

• Little current regulation

What do hedge Funds do?

trying to take advantge of unusual spreads btw security prices